Following is the unofficial transcript of a CNBC EXCLUSIVE interview with Lloyd Blankfein, Goldman Sachs Chairman & CEO, and Erskine Bowles and Alan Simpson, Co-Chairs of President Obama's Deficit Commission, today, Thursday, October 11th at 12:30PM ET on CNBC. Following are links to videos of the interview: http://video.cnbc.com/gallery/?video=3000121706 and http://video.cnbc.com/gallery/?video=3000121899.

All references must be sourced to CNBC.

STEVE LIESMAN : I am here with an all-star-- I'm calling it all-star trifecta. We have Senator Alan Simpson, we have Erskine Bowles, and Lloyd Blankfein of Goldman Sachs. We're going to talk deficit. We're going to go inside Washington and inside Wall Street for just about as long as they're willing to stay. Gentlemen, thanks for joining us.

VARIOUS: Pleasure. Thank you.

STEVE LIESMAN: Erskine, I want to start with you. You made a comment before we came on that said, "They didn't talk about the fiscal cliff or Social Security in the presidential debate." What does that tell you about the state of discussion about the issue of the deficit and the entitlement problems in this country?

ERSKINE BOWLES: People are never going to understand how critical this particular-- particular time in history is. We have $7.7 trillion, trillion dollars worth of economic events that are going to hit America in the gut in December. And in Washington, they're doing nothing about it, nothing about it. We should be asking these guys running for president and every guy running for Congress, "What are you going to do? What kind of steps you're going to take?" You know, if we do nothing, next year you'll have the rate of growth slow to somewhere b-- about, like, 3% to 5%. You'll have unemployment go up another 2% to around-- above 9%. And two million more people will lose their jobs. And we're doing nothing about it. I can't imagine it happening' to Goldman Sachs.

STEVE LIESMAN: Lloyd Blankfein, when you look at the-- at-- at the horizon, what's coming, view of the economy, how serious is the fiscal cliff and how seriously do you hear Washington taking the issue?

LLOYD BLANKFEIN: Well, I think it's very serious. I think-- I think the candidates know how serious it is. I think they're trying to avoid it. It may be, in part, because it is so consequential and serious. And maybe that the ideas-- that ideas that would have to be put forward will be unattractive to some people. Obviously, we're in a position where new discipline's going to have to be imposed. People are going to be disappointed in the consequence. And so I think they're going to-- avoid it. It takes a lot of courage-- to take on these issues. And I think-- it's up to the media to really enforce this onto the candidates, at this point.

STEVE LIESMAN: So you just threw it back at me, basically.

LLOYD BLANKFEIN: Well, I think it's-- and frankly, you could also say for the people who are the most aware of the consequences, namely people like ourselves, who are advisors to company who have to live in the economy, we sure know what the consequence will be. And it will be awful.

STEVE LIESMAN: Senator, if you were in a position now to be advising both candidates, what would you have them say now about the deficit, particularly in light there's a vice presidential debate this evening. What would you like to hear from them?

ALAN SIMPSON: Well, I think I'd want to tell them what a trillion bucks is. I know that's a silly exercise. Just say-- well, let me tell you something about us-- this country. If you spend a-- if you spend a buck a second, you wouldn't hit a trillion for 32, 500 years. And if you spend a million a day since the birth of Christ, you wouldn't be at a trillion. And the big bang theory of the universe happened 13 billion 600 million years ago, that ain't even close to a trillion. And we owe 16 of those babies. So start thinking. And then you're going to borrow $3, 600, 000, 000 a day, every day. You're going to do that today, tomorrow. Every buck you spend, you borrow 41 cents. And I would say, "Will one of you-- let a peep out of yourself of what you're going to do about that and to restore the solvency of Social Security without letting the A.A.R.P. tear your leg off or Grover Norquist on the other side rip the other let.

STEVE LIESMAN: I want to stick with you, Senator. Is your criticism equal for both parties? Is one of them worse?

ALAN SIMPSON: No, you bet. They're both-- they're both in this. They worship the god of reelection. They're figuring all that-- and how to duck every hot issue before November 6th. And then Erskine says the whirlpool of $7 trillion bucks going to hit us like-- like a rainstorm.

LLOYD BLANKFEIN: You know, what I'd-- I'd say here. The fiscal cliff is obviously an important issue. And if we don't get through this moment, you know, there's going to be just a lot-- it-- it'd just be horrible and-- what else I'm going to say may not-- even matter in the long run. But assuming we get through the fiscal cliff, we have to get our budget on a sustainable path, where it's predictable. In other words, we may get through the fiscal cliff by deferring it or by having something where in the long run it's not sustainable. Because our budget deficit will keep growing wider and wider. In which case, the people who have to make decisions won't regard-- gard it as a real long-term solution. What we really need to do is fix the economy of the United States on a sustainable basis, so there's some predictability, so people don't stand on the f-- sidelines, and so they go and invest, and so jobs get created, and other people--

STEVE LIESMAN: Let me stop you right there. You-- are you saying, hearing from clients, when you look at what's happening right now in the economy, in the book of business that you guys see every day, are people standing on the sidelines? Is this something that's affecting the economy right now?

LLOYD BLANKFEIN: Oh, absolutely. The fiscal cliff specifically is one of the major ways in which the slow recovery that we have could be completely derailed. You know, hard landing in China-- Euro collapsing, problems in the Middle East, and fiscal cliff is probably paramount in those-- in-- in that area.

ERSKINE BOWLES: We-- we just met with a dozen-- of the largest, high-tech company CEOs in the country two days ago. And they said, "Look, not only are they hording cash, but all of their customers, all of their suppliers are, because they are scared to death that we're going to go over this cliff. And it could be a catastrophe afterwards.

STEVE LIESMAN: Let me just stick with you-- Erskine. The Simpson-Bowles is not in and of itself going to start the fiscal cliff problem. That is not the solution. If they enacted-- I mean, they can't enact Simpson-Bowles tomorrow, could they?

ERSKINE BOWLES: Well-- well, what-- what-- let me just tell you what the fiscal cliff is. It's the expiration of the Bush tax cuts. It's the expiration of the payroll tax. It's the expiration of the patch that's been put over the A.M.T. so it wouldn't hit the middle class. And it's these mindless, senseless, across-the-board cuts that were put forth as a part of a sequester which came about because of the failure of the super committee. Every one of those issues is addressed in a long term fashion so it doesn't disrupt a very fragile economic recovery in Simpson-Bowles.

LLOYD BLANKFEIN: Steve, just take it from a different direction, some people respond to fear and some people respond to opportunity. Take it from the other side. What if we came up with a situation tomorrow? You opened up a newspaper and there was some conciliation, there was some agreement. It may not be everything that one side would want somewhere in the middle, maybe even closer to the extreme that you didn't like. But there was some compromise that was laid out. What kind of a stimulus do you think that would provide?

STEVE LIESMAN: Tell me what-- what your answer to that question is.

LLOYD BLANKFEIN: Huge. Think of all the money--

STEVE LIESMAN: How much would the market go up on that, Lloyd?

LLOYD BLANKFEIN: I can't-- the market is a separate person. I'd be a buyer of the market. At-- Goldman Sachs would inv-- you know-- you know, we're not only advisors to companies, we're a company ourselves. We would be assuming that our business would grow, that companies would be making more acquisitions, making more investments, that we would be doing more financings. And we would have to get the people on board to make sure that we were able to provide those advices and-- those advice and those services.

STEVE LIESMAN: Senator, real quick?

ALAN SIMPSON: If-- if they did a plan-- they don't even have to go to our legislation. We've got it in legislative language. If they just did a plan that was signed by Democrats and Republicans alike, it would be what we call "the announcement effect." And it would be tremendous.

STEVE LIESMAN: Okay, let's leave it there. We're going to take a quick break and come back. We're just starting to scratch the surface here, with our all-star trifecta, Erskine Bowles and-- Senator Simpson and Lloyd Blankfein. A lot more topics to cover. We'll be back in just a little bit.

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STEVE LIESMAN: Welcome back to our exclusive interview with Senator Alan Simpson, Erskine Bowles of the Bowles Simpson Commission, and Lloyd Blankfein of Goldman Sachs. Lloyd, before the break, you-- we were talking about the negative implications of not solving--

LLOYD BLANKFEIN: Look, the predicate of United States strength and influence in the world is a great economy. We have a huge opportunity. There are a lot of things that are t-- turn very favorable for us. Demographics have turned favorable to us, the technology industries that we're strong in, and most importantly and most unforeseen, the energy situation in the United States. So getting-- it's not just-- you know, Simpson-Bowles and getting our-- our budget in order is fine. But there are other things like energy, too, which we have to sort out, which if we do-- we'll find the United States is in the best competitive position of anyone in the world. And the best competitive position we've been in generations.

STEVE LIESMAN: Erskine?

ERSKINE BOWLES: The big problem we have is how do we get there? As long as we have this huge debt overhang and as long as we don't bring our spending under control or increase our revenue, then we're not going to have enough resources to invest in education, invest in a high-value added research to invest in energy or infrastructure. You know, we-- these-- these are the problem areas that we have to face up to. You know, we spend twice as much as any other country in the world on health care. You know, health care is an enormous problem. It's growing at a much faster rate than G.D.P. Second problem is defense. We spend more than the next 17 largest countries combined on defense. Third, we have a tax code that is inefficient, ineffective, and globally anti-competitive. And fourth, you know, it's Social Security. Social Security is $900 billion cash deficit-- debt-- cash negative over the next decade. We've got to face up to those four big issues.

STEVE LIESMAN: Let me just be clear, though, because the head of the I.M.F., Christine Lagarde, was-- out the other day warning countries against too much austerity. And--

ERSKINE BOWLES: Right.

STEVE LIESMAN: --also pointing out that countries who have done better are those who had a little bit less austerity. Is there a danger with what you're proposing that it's taken too religiously up front here and-- and we end up plunging the country into recession?

ERSKINE BOWLES: No, because that's why-- that's why what we did is we ought to-- ought to phase it in over a long period of time. If you look at what they did in the U.K. compared to what we're doing, it's very similar. You know, we were one dollar-- one dollar of revenue and $3 of spending cuts. You know, we wanted to go for a cost-benefit analysis for all the programs we do. You know, we raised the retirement age. They raised their retirement age. You know, we control the rate of growth of health care. But they're trying to get to balance in five years. That was too much, too quick. We recognize that. So what we wanted to do was phase ours in over a much longer period of time.

STEVE LIESMAN: But-- Senator, it's hard to look at a 1.6% yield on the ten-year right now to see the money that floods into the U.S. treasury market, any time there's concern about anything in the world, and say, "You know what? The deficit's the big problem right now."

ALAN SIMPSON: Well, as Erskine often says, "We're the healthiest horse in the glue factory." Because the trajectory of debt and deficit and interest in this--

ALAN SIMPSON: No, I've tainted him. Slowly over these last three years, I've tainted him. Anyway-- the trajectory of debt, deficit, and interest in this country is exactly the same as the PIG countries, Portugal, Ireland, all of that, Italy, except we're lots bigger. And-- and-- and we-- you know, all I know is this. There's a tipping point. I don't c-- you don't care about whatever, you know, the big business world. He's the number guy, I do the color, but I can tell you. The tipping point is when the people who loan us money say, "You're addicted, obviously. You're $16 trillion. And so we're going to loan you more money, but we want more money for our money." And interest rates will kick up and-- and inflation. And the guy gets hurt the worst is the little guy. What an irony.

STEVE LIESMAN: Lloyd, I want to get your-- your take on this-- 1.6% ten-year yield. Are people-- are businesses concerned about the fiscal cliff? Or are they really long-term concerned about the deficit?

LLOYD BLANKFEIN: Well, it's-- if people are lending money to United-- I mean, listen, would you lend money at 1.6% to ten years with someone with the characteris-- the credit characteristics of the United States? Of course not. We're a reserve currency. People have dollars. Trade is conducted in dollars, pools of dollars. And they're financing us. And they're financing us with enthusiasm until the day they stop. And they don't-- they don't-- they don't blow a horn ten minutes before that happens. So we have to get ourselves-- we have to get ourselves in gear.

STEVE LIESMAN: Does Goldman take action right now to prepare for that music-- for the music stopping? Is it-- do you protect yourself from that?

LLOYD BLANKFEIN: Yes, of course. I mean, we live in-- you know, we protect ourselves from much lower-- you know, from very, very tiny-- for very tiny probabilities. And that's not-- there's a lot of things in the world. Look, we think-- we have reason-- we're optimistic about a lot of things. But we live 98% of our time in the 2% worst possibilities. And that's what we-- plan and prepare for. Let me just say, on the last point, we-- you know, we don't have a lot of room for maneuver, when our budget deficit is so big, to play Keynesian thing and spend a lot more now. At the same time, you don't want to have austerity tomorrow at a time when deficits are lowed and we're worried about deflation. There are some things that from a fiscal point of view, if they're not free, they're cheap. So phasing in tax deduc-- tax-- raises, where you don't have to have another voter down the road. Pha-- phasing in caps on entitlements down the road, where they don't become implemented in the short term. Getting rid of some regulations and rules that are impairing people from investing v-- vast pools of liquidity that are on the sideline, that are not owned by the government, that are theirs to invest but are just sitting on the sideline.

ERSKINE BOWLES: The r-- the reason we have to do it, Steve, let me just give you the very simplest arithmetic. If you take last year, not 20 years ago or 20 years from now, but last year. 100% of the revenue that came into this country was spent on what's called our mandatory spending and interest on the debt. Mandatory spending is principally what we spend on Medicare, Medicaid, and Social Security. That means every dollar we spent last year on these two wars, national security, homeland security, education, infrastructure, energy, homeland security, every single dollar was borrowed and half of it was borrowed from foreign countries.

STEVE LIESMAN: Do you like the-- Romney litmus test that he's going to take every program and see if it's worth it to borrow money from China?

ERSKINE BOWLES: Well-- you know, that's-- that's-- a fun way to say it. But I think you should do a cost-benefit analysis on all the-- all the money you're spending. You know, I can tell you-- let me give you an example. You know, I just ran a university for the last six years. You know, I wanted to see if we could find a program to improve the quality of-- of teacher education. We did. We found 82 of them. Do we need two or three good ones? You bet. We don't need 82.

STEVE LIESMAN: Senator Simpson-- there are some Republicans who think we can get where we need to go without raising taxes. And some Democrats who think we need to get where we c-- where-- where we can go-- we need to go without really substantially cutting entitlements. Are-- are both of them wrong? Is one of them right?

ALAN SIMPSON: There are really not some. There are a lot of them. And-- and-- and they-- you know, you have a situation where Grover Norquist has obtained this pledge in the '80s and the early '90s, he got this pledge that you wouldn't raise taxes under any circumstances, unless there's commensurate, you know, spending cuts. And those guys are in thrall to him. There are 82 guys in the House who didn't run to limit government. They came to stop it. You got the lefties saying if you touch anything in-- in health care or any-- call it anything, you're throwing old ladies off cliffs in their wheelchairs. And then you got the-- the-- the Republicans. But you don't have to raise taxes. You go into the tax code and you rip around in $1, 100, 000, 000 worth of stuff, which is used by only 20% of the American people. Only 27% of the American people--

STEVE LIESMAN: People who itemize.

ALAN SIMPSON: --itemize. So these-- guys have never heard of it. But if you want to know about a stimulus like whether you're listening to Krugman or whoever, we do a pretty good stimulus. It's called the deficit. $1, 100, 000, 000 buck, what the hell do you think that is?

ERSKINE BOWLES: But-- but the answer to your question is, we cannot solely grow our way out of this problem. You could have double-digit growth for a decade and that alone won't solve it. You can't solely tax your way out of it. Raisin' taxes doesn't do a darn thing to change the demographics of a country or the fact that health care's growing at a faster G.D.P. And you also can't solely cut your way out of it, without hurting the truly disadvantaged or without making' such significant cuts in education and infrastructure, energy, and research, that we're not competitive in a knowledge-based global economy.

STEVE LIESMAN: Lloyd, we-- we don't get to talk to you a whole lot. I want to ask you--

LLOYD BLANKFEIN: Sure.

STEVE LIESMAN: 'Cause a lot of this is predicated--

LLOYD BLANKFEIN: Can I just say one thing on that?

STEVE LIESMAN: Yeah, go ahead.

LLOYD BLANKFEIN: Even if it's a matter of economics, you could live life on one extreme or the other. As a matter of political reality, you can't. We're having-- the country is divided on this. Whoever wins the election, I hope they realize that you have to bring the entire country with you. And you have to do this in a bipartisan way or else we're going to be a very volatile system as we go from one extreme to the other extreme as the parties trade-- tenures in office. Whoever does this is going to have to do something more in the middle, just so-- the whole country can form a consensus and go forward. And I see with these two gentlemen here, you have such a great bipartisan spirit. After the election is over, whichever way it's resolved, I hope everyone takes that as a referendum that these questions are decided and that the winning party is generous enough and wise enough to realize you better take the other side with you or you can't--

STEVE LIESMAN: So let me just be clear about something on your-- your personal views. Somebody comes to you and says, "Lloyd, you need to pay 5% more on-- on your-- on your income taxes, in order to solve the deficit." Are you-- are you-- are you in favor of that?

LLOYD BLANKFEIN: Of course, to s-- let me say-- let me use my formulation. If you paid 5% more, you would solve the problem in a heartbeat. I don't know anybody who wouldn't pay that kind of price to benefit the-- you know, the-- you know, our country. The questions that come up, are people going to-- the pressure that's put on people who would otherwise advocate tax raises is, "How would you spend it? And will this defer the hard choices that have to be made down the road?" No one is so unpatriotic that they wouldn't contribute a little bit more to resolve it. The issues is over what resolves it.

ERSKINE BOWLES: And you shouldn't pay 5% more unless you're willing to also make some cuts in the spending side. You know, we've got to put the fiscal house in order and just paying more won't get us to the promise land.

ALAN SIMPSON: And if you can't learn to compromise an issue without compromising yourself, you sure shouldn't be in Congress. In fact, you shouldn't even get married. If you

LLOYD BLANKFEIN: By the way--

ALAN SIMPSON: And that's where we are. We're stuck.

LLOYD BLANKFEIN: You shouldn't go to Congress needing to learn to compromise. P-- politics is the art-- the definition of politics is the art of getting things done. You should be elected for being willing and being able and capable of compromising in the first place. Just think of the pressure that was put on-- Rahm Emanuel in Chicago for letting-- for letting that teacher's strike go on for days. Could you-- I mean, look at the pressure that was brought to bear on the unions, on the government. Look what we have at stake here in Washington for the whole country. Don't you think a little bit more pressure should be put on achieving a compromise?

STEVE LIESMAN: Lloyd, I want to stick with you, because I want to ask you a lot of this-- of-- of the outcomes we're talking about here predicated on economic outcomes. Give us your view of the-- the U.S. economy and how concerned you are about what's going on globally-- in the economies?

LLOYD BLANKFEIN: I think there's a lot of issues in the world today and a lot of opportunities. I think for one thing, a lot of the context that drove the credit bubble in some ways and led to overleveraging-- created bad values, but still are intact. So for example, you think of the demographics around the world, creation-- wealth creation in China. They may have a bad year, but they're not going to have a bad century in China, in terms of wealth creation. You think of technology, other advances, the energy situation. I think-- I'm very optimistic in the longer term. And there are problems in the short term. I mention China. I think that works through. But it might not in the short term. I feel more comfortable about fi-- next five years than the next five months or the next year and a half. I think Europe looks much better than it did six months ago, but they have a lot of wood to chop. But I will tell you the big shock of a derailment of the Euro, I think the-- the official sector did a good job of if not taking it entirely off the table, really relieving some people's short-term concerns as they muddle through. The United States actually, I think, has some of the greatest blessings around, except that-- look, all the other problems in the world are real structural issues, China, the-- the structure of the Euro. In the United States, a lot of our problems are self-inflicted and could be self-resolved. And by the way, it makes the long-term consequence in the judgment of history a lot more severe if we don't solve these resolvable problems.

STEVE LIESMAN: I'll just stick with you one-- one-- one more-- one more-- question here-- Lloyd. To listen to the situation as laid out by-- Misters-- Misters Bowle-- Bowles and Simpson-- you wouldn't think we'd have a stock market at an all-time high. If things are in such bad condition, why is the market where it is? Is it-- is it too lofty? Is it a bubble right now?

LLOYD BLANKFEIN: For one thing, interest rates are so low that people are looking at equities as a high-yield asset class. People are looking at dividends that are much higher than the ten-year government bond rate. So that's one thing that's fueling it. I think you also have--

STEVE LIESMAN: You advise caution on that?

LLOYD BLANKFEIN: I advise caution on everything. And not only do I advise it-- not only do I advise it, I try to demonstrate it.

ERSKINE BOWLES: The-- the thing that worries me is I think the market has priced in the fact that we're actually going to get a deal. They don't believe we'd be stupid enough to go over this cliff and have, you know, this economic crisis.

STEVE LIESMAN: Is that how you would bet, Erskine?

ERSKINE BOWLES: No, I'm really worried that if we don't get these guys to pull together rather than pull apart that we face not only the most avoidable company crisis in history, but we face the most predictable.

STEVE LIESMAN: Is that your bet, though? What is your bet?

ERSKINE BOWLES: I think we got about a 30% chance to get this thing done before the cliff. I think we've got about a 30% chance to get it done immediately thereafter. And we got about a 30%-35% chance--

STEVE LIESMAN: And Senator, where would you put the odds?

ERSKINE BOWLES: --that we won't get it done at all.

ALAN SIMPSON: Don't forget another antipathy that-- that politician-- doesn't-- doesn't like or believe the business people and the business people don't like or believe the politicians. And that's historical. I mean, that's the way it works. I don't know what's going to happen, but I'll tell you, I think there are just roses out there on-- in the stock market. You-- they-- they can borrow money for nothing. The stock market, as-- as Lloyd says-- you know-- they can-- money, the return, the yield-- cash all over the place. And-- and-- and it's like the grasshopper and the ant. Only my grandmother remembers that. But I tell you, the indust-- the industry-- the guys who are working and putting to the side are going to make it. And the guys who are just whistling around like-- I think in the market. And I'm not here to dampen that. But holy smokes, they really believe, honestly, that no Congress could be this stupid. And by God, they can.

LLOYD BLANKFEIN: You know, one other thing on the stock market, you also have the Fed, you understand, who's basically saying there's a penalty for holding cash. And they're engaged on a policy to take up asset prices. And so-- and it-- and it's kind of ironic that money's leaving its equity market now and going into fixed income market at these very low rates. People may, in a bit, look back and wish they'd done the opposite.

STEVE LIESMAN: But Lloyd, there's-- there's a school of thought right now that what the Fed is doing, buying-- treasuries, enables the deficit spending that's going on in Washington. Do you subscribe to that?

LLOYD BLANKFEIN: In part-- of course. In other words, if people-- anybody who--

STEVE LIESMAN: So should the Fed stop for that reason?

LLOYD BLANKFEIN: No. I-- I think the Fed is being very aggressive and, I think, courageous in doing what they can. There's very little monetary tools left. But, you know, they have a mandate. And they're deploying all that they have. But there's nothing that will comp-- that will allow the Fed to compensate for-- a total abdication by the people--

ERSKINE BOWLES: Of-- of fiscal responsibility.

LLOYD BLANKFEIN: Of fiscal responsibility.

STEVE LIESMAN: Erskine, give us-- give us some numbers. What would happen to the total debt burden if either A) the Fed stepped out and-- and interest rates and-- and B) if interest rates normalize? How-- how much lower is it now than it otherwise would be--

ERSKINE BOWLES: Well, I mean--

STEVE LIESMAN: --if we were a 3% economy?

ERSKINE BOWLES: I-- I'll give you-- I'll give you the greatest example. We're spending about $230 billion a year on interest right now. If interest rates were at their normal level, you know, at-- the median level they were in the 1990s or the first decade of this century, we'd be spending about $650 billion on interest alone.

STEVE LIESMAN: So do you foresee being asked to be in a position to give that kind of numbers to the-- president of the United States if you're asked to be treasury secretary?

ERSKINE BOWLES: N-- no, I don't.

STEVE LIESMAN: You don't want the job or don't expect to be asked?

ALAN SIMPSON: You mean you wouldn't talk to them?

ERSKINE BOWLES: I expect to be living in North Carolina for the rest of my life.

STEVE LIESMAN: Well, you could do the job from there, couldn't you?

ERSKINE BOWLES: Well, if they'd move the Treasury to North Carolina, that'd be great.

LLOYD BLANKFEIN: You didn't ask, but I'll pass on the job, as well.

STEVE LIESMAN: Okay, all right.

ALAN SIMPSON: You can't count me out. He does the numbers. I do the color.

STEVE LIESMAN: I guess that leaves me, right? Never mind. Lloyd, I want to ask you just quickly about Wall Street and what's going on. Their M & A volume not doing so good. And-- and I-- I understand, this is a fascinating fact that I looked up, when you did your I.P.O., you said a 40% return on equity. Now it's 5%. What's the right number?

LLOYD BLANKFEIN: Well, I don't remember 40% return on equity. You know, we're going to have to let things sort out, as between the opportunity set and where regulation and amount of capital. You know, R.O.E. is a matter of how much E you have also, not just the R, which are returns, how much equity. And that's not all sorted out yet. So we're going to have to-- see that ev-- how that evolves. I'd say for Wall Street, the things that Wall Street do contribute to growth but they're also dependent on growth. We advise companies who want to do transactions. We finance transactions. We help people manage risky assets. We hedge people who do economic activity. In a period of time when economic activity is slow, guess what, we're going to be slow too. As that speeds up, we'll speed up generally as some multiple of that change.

STEVE LIESMAN: Uh-huh. There's a book that's coming out that I think you are familiar with this book that's coming out by-- a trader-- an executive who used to work at-- at Goldman Sachs, Greg Smith. How concerned are you about what revelations might be in that book?

LLOYD BLANKFEIN: You know, I'm not really concerned about the revolu-- revelations. I tell you, I'm not looking forward to the hoopla around it, if there's the hoopla that-- that-- greeted his op-ed is any indication. But there's not a lot in it to begin with. I haven't seen the book. And I haven't talked to Greg S-- in fact, I never spoke to Greg Smith. But we went over everything like crazy. There weren't real sharp accusations. There were c-- soft things like culture and things like that. But we surveyed his own reviews and what people said about him and what he said about e-- everybody else. And frankly, we could find nothing. We had to report this to our board. And guess what? We're a highly-regulated company. The regulators were interested in this stuff. And we still found nothing of consequence. So you know, we'll take it, you know? And guess what? When we think about what's gone on the last four or five years, it will just go into the mix.

STEVE LIESMAN: I want to come back to some of these issues, but I do want to ask Senator Simpson, would you tell me if you had the opportunity to talk directly to Candidate Romney and Candidate Ryan, what would you want them to say? What would you advise them to say? What do you want to hear from the candidates in your own party when it comes to this issue?

ALAN SIMPSON: Well, I think Romney is right on track, when he starts to say, "I know how to govern. And you govern with the other side." And when he said during the debate that he-- he was a governor of a tough state, you know? And he dealt with a legislature of 87% Democrat and he got things done. He did a health care bill, whether you like that or not. He balanced the budget. And people are thirsting for that. I tell you what they're not thirsting for, Erskine and I go around the country, they're tired of B.S. and mush. And they're looking for somebody to tell them the truth. And Ryan will do that. And Joe, I know-- I know Joe very well. But I tell you, the reason they savage Ryan, he's dealing with the driver in the engine compartment that can wipe out America. And that's health care. You have-- that's the engine. It's on automatic pilot. And it will suck up every discretionary part of the budget, unless you put the brakes on. And that's why they rip him.

STEVE LIESMAN: But Senator, I just want-- I just want to interrupt you on that. Because it sounds to me like you are not displeased with what you're hearing from your candidates right now. And yet, we all agreed at the beginning that it was unbelievable they didn't bring up the deficit-- Paul Ryan opposes your plan.

ALAN SIMPSON: I know it. And--

STEVE LIESMAN: He dissented.

ALAN SIMPSON: --so did the president. I mean, and everybody opposes-- we've pissed off everyone in America. Nobody's doing anything for us.

STEVE LIESMAN: Well, at the risk of pissing you off, I mean, I just want to be clear here. I asked you to talk to Romney and Ryan. What would you say to them--

ALAN SIMPSON: I would just say, "Well--"

STEVE LIESMAN: --that you have concerns about.

ALAN SIMPSON: Tell them we have a leaderless government and they lead. They're govern-- they can govern. This gentleman can't govern. He can't govern.

STEVE LIESMAN: Erskine Bowles.

ALAN SIMPSON: He's-- he's doing politics day and night.

STEVE LIESMAN: Erskine Bowles, same question to you. If you had a chance to talk-- to advise-- Obama-- Obama and Biden on what you want to hear about the deficit and-- the fiscal cliff, what would you want to hear? What would you tell them to say? What are you not hearing now?

ERSKINE BOWLES: To lead, lead from the front. Let's just take on this-- this-- this enormous problem we have with economic growth. The best way to take that on is to reform the tax c-- code, to broaden the base, to simplify the code, to wipe out these tax expenditures and use that money to reduce rates to encourage growth and also to bring down the deficit. Let's really attack these entitlement problems. Let's slow the rate of growth of health care. Let's slow it to the rate of growth of the economy. Let's really do something about Social Security to make it sustainably solvent. Let's reduce this defense spending. We can't afford to spend more than the next 17 largest countries. And then let's take that money and some of it invest it. And let's invest it in those things that America has to invest in to be competitive globally.

STEVE LIESMAN: Lloyd?

ALAN SIMPSON: I would say the same thing to the-- to the candidate of my party.

LLOYD BLANKFEIN: You know, the-- the answer to that, of course, you've never done enough. And I think Wall Street has been-- you know, business in general, Wall Street particular, finance in particular, has been-- a bit under the gun. And I think some reaction and, you know, shame on us to some extent, has been to hunker down and keep our heads below the parapet. And, you know, something, we have a stake in this coun-- country like everybody else. And I think we have the experience and the competence to give our-- let people know what the consequences-- the political sector will make these judgments and reconcile these different choices. But I think we have to get out there and explain what the consequences are.

ERSKINE BOWLES: Which is exactly what Lloyd is doing now. And I really thank him for doing it. It's the same thing that other CEOs are doing now, throughout the country. We've had about 75 to 80-- Fortune 500 CEOs come together and form a CEO Fiscal Leadership Council to tell these members of Congress, "Let's face up to these problems." You know, like Lloyd said, "I'm willing to pay more taxes. But I'm willing to pay them only if we also put our fiscal house in order and do the smart, tough things on spending."

STEVE LIESMAN: Yes. Lloyd, one of the things the administration high school said is that they don't-- they want to have a burden sharing, that they feel as if you have to charge wealthier people more money if you're going to cut back on entitlements which affect poor people-- in-- in greater percentages. Is that a compromise that you're willing to make?

LLOYD BLANKFEIN: Sure, listen. You know, my politics-- I-- you know, I'm probably-- you know, I'm on the left center side of things. I'm not-- I don't mind paying higher taxes. I don't mind progressive taxes. But I would say there's-- the economic system has to accomplish at least a couple of things. One is to create, generate wealth, and the other is to have a fair way of distributing it. I'd say the first is a pro-- is a predicate for the second. I don't want to do anything--

STEVE LIESMAN: You have to have wealth to distribute?

LLOYD BLANKFEIN: Right, I don't want to do anything in the redistribution that-- that tamps down on the-- on the generation of wealth.

STEVE LIESMAN: Well, one of the things that's been-- criticized for not-- for curtailing wealth generation has been regulation and even some of the lawsuits that are out there. There's been a lot of-- pressure on Wall Street, a lot of-- a lot of legal actions that have been taken against Wall Street-- in the past, just the past several months. Do you think those are politically motivated?

LLOYD BLANKFEIN: Look, it's a political process. So politics enters into everything. But there's-- look, nothing would suit me more than for all the leg-- legacy issues fade away. But you know something? The country went through a big trauma. We're a democracy. In some cases, it's an-- you need an escape valve for it. So I accept the fact that we're going to have to deal with legacy issues. But I would like to spend a higher proportion of our time dealing with the future and with the current problems we face.

STEVE LIESMAN: I want to see if I can get one more aphorism out of-- Senator Simpson here. I know we have to go.

ALAN SIMPSON: Aphorism?

STEVE LIESMAN: Maybe that was the wrong word. When we're back here a year from now, are we going to have a debt deal on the table? Is this country going to be well along towards solving the fiscal problem or is it going to be worse?

ALAN SIMPSON: It's going to be you betcha. Because the-- the-- the axe is going to swing. And the club is going to come down. And people are going to say it to their elected representatives, "Look, I had to pay more interest because you guys didn't do anything. I'm getting it stuck right and left. And you did this to me. And now go correct it."

ERSKINE BOWLES: The American people are way ahead of their politicians.

ALAN SIMPSON: They're way ahead.

ERSKINE BOWLES: Way ahead of the politicians. They know we've got a problem. And they want those politicians to stand up and get the job done. For generations, we've asked our politicians to bring home the bacon. Well, the pig is dead.

LLOYD BLANKFEIN: We've done this before in our history, Steve. You know, you think about-- you know, this-- the current period always gets analogized to The Great Depression and the aftermath. You know, in The Great Depression, there was a war between the President Roosevelt and business interests. And you think of all those-- all those changes, the F-- you know, the trials, the hearings, everything else, the S.E.C. was creation. And all that pressure, malefactors of great wealth, the accusation that flew. But once there was the kind of a whiff of-- of a national crisis, you know, war in Europe, way before the war, but when you start-- people started to feel it, there was a pivot. And I remember, at the time, Roosevelt called in-- people he'd previously called plutocrats and malefactors of great wealth, and they had a meeting. And the United States went from a country that had no arsenal at all to within a couple of years be-- being so productive that it could not only arm itself but become the arsenal for every other country in the world. That was an incredible feat of partnership and productivity. And I look-- I hope that at the end of this election, without having such a grievous national crisis as occurred in the late '30s and the early '40s, that we can get to the same place.

STEVE LIESMAN: Okay, that's a great place to leave it. Lloyd Blankfein, Erskine Bowles, Senator Simpson-- thank you very much for your time.

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